 Robert B. Jones, JD, CPA, CEBS, CSCP
 CEO, Innovative Compensation and Benefits Concepts, LLC
 Conshohocken, PA
 November
22, 2011Robert Chapter
B. Jones, JD,
CEBS, CSCP
Philadelphia
ofCPA,
NACD
 CEO, Innovative Compensation and Benefits Concepts, LLC
2014 Compensation
 Philadelphia, PAUpdate:
“Following Februrary
the Right
22, Path
2011 in 2014”
Robert B. Jones, JD, CPA, CEBS, CSCP
CEO, Innovative Compensation and Benefits Concepts, LLC
Philadelphia, PA
May 14th, 2014
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Innovative Compensation and Benefits Concepts
Quotable
“Despite our concerns regarding the goals of the original
provision, we understand that as a matter of U.S. law, …SEC… is
mandated to pass a rule implementing it. In a previous comment
letter…..sent Nov. 18, 2010, NACD noted an “unfavorable costbenefit ratio for the rule, with no perceivable benefits and
significant costs,” and urged the SEC to implement this
provision with “extreme care. We still believe this to be true…”.
NACD letter of 12/1/13
“The pushback is that this calculation between top executive
pay and median employee pay is actually a really hard
calculation to make. It can be extremely hard with a global
corporation with hundreds of thousands of employees or even
millions of employees in the case of a company like Wal-Mart to
figure out what exactly the median employee's paid, especially
since some work part time, some may work in other nations”.
Lynn Stout, Cornell Law Professor, NPR, 10/26/13
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Innovative Compensation and Benefits Concepts
Today’s Agenda
1. Brief Review of executive pay practice
trends for 2014.
2. Brief Review of best practices for Say on
Pay in 2014.
3. The New Dodd-Frank SEC Pay Ratio Rule-Value or Folly?
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Innovative Compensation and Benefits Concepts
The Changing Compensation
Environment—Companies Continue to
Re-Think their Compensation Strategy
Innovative Compensation and Benefits Concepts
The changing compensation environmentrethinking the compensation strategy
Significant Forces Affecting Executive Compensation in 2014
Regulators
• SEC
Financial
• FASB and IASB
• Manage earnings expense
Lawmakers
• Manage dilution
• Sarbanes-Oxley Act
• Deferred comp
reform
• More from Congress?
• Cost vs. perceived value
• Economic conditions
Impact on Future
Designs
Stakeholders
•
•
•
•
•
Stock Exchanges
Shareholders
Proxy advisory firms
Employees/Retirees
Labor unions
Corporate governance
• New proposed
governance rules
• Listing requirements
Media
• Heightened vigilance
and skepticism
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Innovative Compensation and Benefits Concepts
Major Issues in 2014
In a “perfect storm” 3 main issues are surfacing at once:
How can organizations be confident that their compensation
programs are fully aligned with 2014 business objectives?
What does the current regulatory environment mean for the
future design of executive remuneration programs?
How can organizations be sure that their rewards programs
attract, retain, and motivate their top executives for the long
term?
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Innovative Compensation and Benefits Concepts
1. Executive pay practice
trends for 2014
Innovative Compensation and Benefits Concepts
Key Equity Compensation Trends from 2013
For the 3rd year in a row, long-term performance shares increased in prevalence.
According to one major survey, they are now used by 81% of the Top 250 (up from
75% in the 2012 report), and are the most prevalent form of equity. Restricted stock
usage has also increased this year, from 58% to 63%, while the use of stock options
and long-term cash plans remains largely unchanged.
Companies are still emphasizing a portfolio approach to their long-term incentive
programs (LTIPs), with an increasing number of companies using 3 LTI grant types
(39%), while those granting one or two types declined.
Total Shareholder Return (TSR) has become the most prevalent performance
metric (for the first time) for LTIPs, featured in 50% of all performance awards, as
companies continue to look for ways to tie executive compensation to shareholder
experience at the urging of proxy advisory firms and shareholder advocates.
Overall, the design of LTIPs has become more complex as the number of grant
types, number of performance award measures, and prevalence of the concurrent
use of absolute and relative measures all increased.
Source: Frederic W. Cook & Co. 2013 Top 250 report
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Innovative Compensation and Benefits Concepts
Current Equity Pay Trends
---2
Because of the rising stock market last year, while the total dollar value of
LTIP awards increased, the number of shares required for those
awards decreased.
The use of full-value awards continues to increase, with companies
showing a median equity mix of 67% full-value awards and 33%
appreciation awards based on the number of shares granted, and 86%
full-value awards and 14% appreciation awards based on the fair value of
equity awarded in the year.
For the near term, it seems clear that full-value awards, particularly
performance-based awards, will continue to be the primary award
vehicle in the LTIP portfolio of large U.S. companies. However, while
decreasing in influence, stock appreciation awards are in no danger of
disappearing and continue to have a place in the LTI mix. The evolution in
equity award usage will continue.
Source: Frederic W. Cook & Co. 2013 Top 250 report
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So what’s the problem ?......
Major Disconnect between the views of
investors and the views of directors:
Nearly 3 in 4 investors (72%) say that the executive pay model
in the US has led to excessive CEO pay levels while only 1 in 5
directors (20%) say the executive pay model has led to
excessive pay levels
7 in 10 directors (70%) say the executive pay model at most
companies is closely linked to company strategy, compared
with just 1 in 3 investors (34%).
Less than one-fourth of directors (23%) say executive pay is
overly influenced by management, versus two-thirds of
investors (66%).
Source: Towers Watson, January 16, 2014; Evolving Director and Investor Views of Executive Pay
in the Say-on-Pay Era
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Innovative Compensation and Benefits Concepts
Current Equity Pay Trends
--3
According to one survey, stock grants are most
common, followed by performance shares/units.
Stock Grants/Awards:
81%
Performance Shares/Units: 72%
Stock Options/SARs:
54%
Source: Deloitte/ NASPP Annual 2013 Survey—”Top Trends in Equity Plan Design”
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Innovative Compensation and Benefits Concepts
Say on Pay for 2014
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Executive Summary
Key Takeaways from the Past Year:
Compensation committees have become more disciplined and
effective in analyzing and designing executive compensation
programs.
The adoption of Say-on-Pay for publicly-traded companies and
additional shareholder scrutiny of executive compensation
arrangements have definitely played a role in the increase of
granting performance-based awards.
Most companies, even those with good Say-on-Pay
shareholder voting results, have been proactively reaching out
to shareholders over the past few years to interactively
discuss, review and analyze what their key shareholders think
about executive compensation.
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Innovative Compensation and Benefits Concepts
Say on Pay Results
3,363 companies held Say on Pay votes in 2013
73 companies have failed with an average 60% “Against” vote
(Two additional companies received less than 50% ‘For’ but considered the
vote a win because ‘For’ votes outnumbered ‘Against’ votes due to
abstentions).
15 companies failed previous votes
70.6% of companies have received a greater than 90% ‘For’
vote
8.4% Average ‘Against’ vote
1.8% Abstentions
[One company, Looksmart, received 100% ‘Against’ on their
Say on Pay vote]
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Innovative Compensation and Benefits Concepts
Say on Pay Results
---2
Total fail rate= 2.2%
Average vote for those who passed: 91%
Average vote for those who failed: 37%
>90% “For” vote: 70.6%
70-90% “For” vote: 20.8%
50-70% “For” vote : 6.2%
<50% “For” vote: 2.3%
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Innovative Compensation and Benefits Concepts
Say on Pay Results---3
ISS: <70% approval rating---will have to
address any perceived shortfalls in
procedures, votes, etc.
Glass-Lewis: <75% of vote, will be looking
for an explanation from the Company
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Innovative Compensation and Benefits Concepts
NACD Pay for Performance research
December, 2013 NACD Paper on P4P:
1. Need for Standard Definitions
2. Need for consistent time horizons oriented to the
Long Term
3. Need for Disclosure beyond the CEO
4. Importance of Board Judgment and Company
Context
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Innovative Compensation and Benefits Concepts
Pay for Performance is Still Key
Bottom Line:
Companies need to stress in their CD&A/proxies the
linkage between pay-for-performance and what they
have accomplished as a management team during.
the past year. Pay-for-performance is now the
mantra for compensation consultants and
investors—and compensation committees too.
Companies also need to show how their pay
practices have aligned with the performance of the
Company and the performance of the pay packages
for the NEOs
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Innovative Compensation and Benefits Concepts
Important to Also View Pay for Performance
from the Proxy Advisors’ Perspective
Public companies also must develop a clear understanding of
the perspective of proxy advisory services that analyze
company practices and advise institutional investors on the
voting of their shares.
One of the most well-known proxy advisors, (ISS) uses detailed
criteria to assess companies’ executive pay practices:
These criteria include:
 The long-term relationship between CEO pay and total
shareholder return
 The portion of total compensation delivered via
performance-based vehicles
 The use, type and disclosure of performance measures
and goals
 The existence of “poor” pay policies and practices.
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
Innovative Compensation and Benefits Concepts
CEO Pay Ratio Controversy
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The Pay-Ratio Rule in Broad Terms
The pay ratio rule is a provision in the Dodd-Frank Act
that requires the SEC to publish rules requiring public
companies to disclose the ratio of the CEO’s total
compensation to the median employee’s total
compensation.
The average multiple of CEO compensation to that of
rank-and-file workers at companies in the S&P 500
Index is 204, according to data compiled by
Bloomberg.
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Innovative Compensation and Benefits Concepts
What do opponents and proponents say ?
Critics say the rule will do the following:
The ratio will be misleading
The pay ratio is a headline statistic, not an
actionable tool
Compliance will be costly
Supporters say the rule will do the following:
Provide greater transparency
Reduce pay
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Innovative Compensation and Benefits Concepts
Tempest Brewing: Many Business Groups Urge Repeal of
CEO-to-Worker Pay Ratio Disclosure Rule
The provision was reportedly a last-minute addition
to the Dodd-Frank legislation.
Many business groups have been fighting this
provision.
A proposed rule was issued on September 18, 2013
with the SEC voting 3-2 along partisan lines.
A 60-day comment period for the SEC began with
the publication of the rule. Comments were due by
December 2nd, 2013, but are expected well into 2014.
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Innovative Compensation and Benefits Concepts
Many Business Groups Urge Repeal of CEO-toWorker Pay Ratio Disclosure Rule ---2
On the day the proposed rule was announced, the SEC said it
had already received 22,860 comment letters and a petition’s
sender that was not disclosed with 84,700 signatories. Many of
the comment letters were form letters. The actual number of
unique letters was 260, fairly evenly divided between pro and
con.
From the “pro rule” camp, the SEC received letters from labor groups
such as AFL-CIO, UAW Retiree Medical Benefits Trust, (left-leaning)
Institute for Policy Studies, and the Independent Drucker Institute,
Calvert Investment Management, and Americans for Financial Reform.
From the “against the rule” camp, the SEC received letters from
NACD, American Bar Association and numerous law firms, Society of
Human Resources Management (SHRM), Towers Watson, Pay
Governance, Meridian Compensation Partners, and the Society of
Corporate Secretaries and Governance Professionals.
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Innovative Compensation and Benefits Concepts
Business Groups Urge Repeal of CEO-to-Worker
Pay Ratio Disclosure Rule --3
The new rule, required under the Dodd-Frank Act, would not prescribe
a specific methodology for companies to use in calculating a “pay
ratio.” Instead, companies would have the flexibility to determine the
median annual total compensation of its employees in a way that best
suits its particular circumstances.
In a letter sent to SEC Chair Mary Schapiro, nearly two dozen business
groups asked the agency to "engage in expanded public outreach and
consideration of alternatives" before moving forward with
implementing the new rule.
The proposed rule would not specify any required calculation
methodologies for identifying the median employee in terms of total
compensation for all employees. Instead, it would allow companies to
select a methodology that is appropriate to the size and structure of
their own businesses and the way they compensate employees.
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Innovative Compensation and Benefits Concepts
Business Groups Urge Repeal of CEO-to-Worker
Pay Ratio Disclosure Rule --4
For example, a company would be permitted to identify the
median employee based on total compensation using either its
full employee population or a statistical sample of that
population.
A company could, for example, identify the median of its
population or sample:
 Using annual total compensation as determined under existing
executive compensation rules.
 Using any consistently used compensation measure such as
compensation amounts reported in its payroll or tax records. A
company would then calculate the annual total compensation for that
median employee in accordance with the definition of total
compensation set forth in the SEC’s executive compensation rules.
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Innovative Compensation and Benefits Concepts
CEO-to-Worker Pay Ratio Rule--Early Returns
For total direct compensation overall, one consulting firm
found that the median CEO pay multiple among all companies
studied is 25.8x, although there was considerable variability
within the studied companies.
While they found no compelling differences between industry
groupings, they found that the CEO pay multiple is most
closely correlated to organizational size; the larger the
company the higher the multiple.
The second most influential factor for CEO pay multiples
appears to be a company’s degree of globalization. The finding
was that the CEO pay multiple to non-US employees is more
than twice as large as the multiple to US employees.
Source: Radford
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Innovative Compensation and Benefits Concepts
CEO pay has clearly risen....
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Innovative Compensation and Benefits Concepts
But, the CEO job today is much more demanding…
Research from some sources shows that the CEO’s pay
package compared to the size of the S&P 500 has tracked its
growth very closely since World War II. (Columbia University
Professor Guadalupe’s study using proxies since WWII). She
argues that 3 factors: increased company size, a strong market
for generalists, and global competition have helped to cause
the rapid increase in CEO pay over the past 30 years.
The CEO’s job is extraordinarily complex in 2014,
encompassing many more skillsets than in 1980, nearly 35
years ago. The world is much more complicated today. One
more quote: “Where is the outrage at professional athletes who make that
kind of money? Managing an international company with thousands of
employees is more important than winning a championship. There is a
similarity though, in that its worth paying top dollar for the very best. If you
have a billion dollars a year in revenue, you don't want to skimp on who you
put in charge of that”.----Adam Allen post
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Innovative Compensation and Benefits Concepts
The view in support of the SEC pay ratio rule…
What is so important about the pay ratio numbers ?
Peter Drucker, the father of business management, famously
said the CEO-to worker salary ratio should not exceed 20:1,
which is what existed in the United States in 1965. Beyond that,
managers will see an increase in 'resentment and falling
morale,' said Drucker. (Reportedly, Andrew Carnegie also had
his own ratio in mind).
Many supporters say that the rule will continue to draw public
attention to the disparity in executive pay compared to the rank
and file, even causing executive pay to not continue to rise at
such a high rate.
A few experts have suggested that the IRS make CEO pay a
non-deductible business expense when it is higher than a
given number such as 100 times the minimum wage.
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Innovative Compensation and Benefits Concepts
The view in support of the SEC pay ratio rule
---2
Across the “pond”-------The movement in Europe is to make say on pay votes not merely
advisory but mandatory. In Great Britain, where it has become a
binding vote, UK firms responded to negative say on pay voting
outcomes by removing controversial CEO pay practices criticized as
rewards for failure (e.g., generous severance contracts) and
increasing the sensitivity of pay to poor realizations of performance.
Swiss voters, (from a traditionally business-friendly and conservative
European country) on November 24th, 2013 decisively rejected a
proposal to cap pay for top executives. Final results showed that
votes against were 65.3% to 34.7%. The ground-breaking proposal
would have meant executives would have been unable to earn more in
a month than their lowest-paid workers in a year (12x). In March,
voters approved a measure that boosted shareholders’ power over
managerial salaries and banned one-off bonuses – so-called "golden
hellos" and "golden goodbyes".
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Innovative Compensation and Benefits Concepts
The view in support of the SEC pay ratio rule
---3
California lawmakers are proposing higher tax rates on
companies that pay their chief executive officers more than
100 times the wages of a typical worker. The bill, which would
likewise give tax breaks to companies with lower ratios,
passed the Senate Governance and Finance Committee
yesterday in a 5-2 vote, with Democrats in favor and
Republicans opposed. California would be the first state to
penalize or reward publicly traded corporations for their
compensation practices.
Whole Foods is reportedly one of the few public companies to
disclose that it maintains a fixed ratio between executives and
worker pay (cash compensation limited in 2013 to 19 times the
average annual wage).
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NACD’s comments (12/1/13 letter to the SEC)
“Our views reflect recent surveys of our members, as well as the
values implicit in the findings of NACD’s thought leadership groups
such as our Blue Ribbon Commissions and Fortune 500 committee
chair advisory councils. This letter also incorporates perspectives
from NACD chapter leader roundtables, director forums, director
education programs, and other events focused on promoting effective
governance practices”.
“The pay ratio provision appears to have two main goals—one related
to information and one related to social change. Its original sponsor
wrote it “so that investors and the general public know whether public
companies’ pay practices are fair to their employees, especially
compared to their highly compensated CEOs. In addition, some
supporters clearly hope that the disclosure will have the ultimate
effect of narrowing differentials in pay. We do not believe that the rule
accomplishes the first goal, and question the appropriateness of the
second”.
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What’s the view opposing the SEC pay ratio rule?---4
Several pieces of legislation have called for the repeal of the act
in whole or in part:
HR 46---filed by Michelle Bachmann, (R-MN)
S. 20----filed by Sen. David Vitter (R-LA)
The US House Financial Services Committee voted in favor of the
Burdensome Data Collection Relief Act (HR 1135), sponsored by Rep.
Bill Huizenga (R-MI) to repeal the entire law.
2 main legal cases are pending:
A group of banks challenged the law in State National Bank of Big Spring v.
Geithner (appealed to higher court); in September the attorney generals of
Michigan, Oklahoma and South Carolina joined the case as plaintiffs;
National Association of Manufacturers (NAM), Chamber of Commerce, and
the Business Roundtable in July sued the SEC in the lower court and got
rejected; NAM has filed a notice of intent to appeal the July 23rd,decision.
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Actions to Consider
Innovative Compensation and Benefits Concepts
What Actions Should Employers Consider ?
Review compensation strategy in light of current environment
Review your Compensation Committee’s usage of peer groups
and how they fit into the overall evaluation of executive pay.
Examine your employees’ situation from a Total Rewards
standpoint—consider the total picture
Promote stock ownership for employees wherever possible—
owning a piece of the rock is important
Review your Board governance and compensation practices
Monitor the ongoing programs carefully each year based on
your Compensation Philosophy and your targets
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Innovative Compensation and Benefits Concepts
Any Questions ???
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Innovative Compensation and Benefits Concepts
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CEO-to-Worker Pay Ratio Rule